A $15 Trillion Private Piggy Bank
All Paulina Castanon de Salinas did was turn up at the Geneva headquarters of Banque Pictet one day last November to transfer $1 million to a new account and retrieve a phony passport from the bank's vault.
Castanon, the wife of former Mexican President Carlos Salinas de Gortari's well-connected brother, Raul, had visited the elite private bank to help her husband shift some of the $120 million he is estimated to have spirited out of his homeland, largely via Citibank's global money network. Police arrested Castanon shortly afterward. Although she was subsequently released, the furor over the Salinas millions is anything but dying away. Not only has the discovery of the funds sparked a global investigation of the former First Brother's offshore finances. It has also thrown an unwelcome spotlight on the immense and shadowy world of private banking.
This was once a tight little universe, dominated by a handful of Swiss lenders offering hand-holding and extreme discretion to Arab sheikhs, Latin potentates, and European nobility. But as free enterprise spreads across the developing world and baby boomers reach their prime income and savings years, private banking has increasingly become a rough-and-tumble contest among the heavyweights of global finance.
WEALTH ZONES. From Deutsche Bank to Merrill Lynch, everyone is chasing the $15.45 billion in assets--or so Citicorp estimates--that upper-bracket individuals around the world have available for investment (chart). And by some estimates, these assets are expanding at a double-digit rate every year. "The market is enormous, and it continues to grow," says Barry R. Sloan, Credit Suisse's chief of private banking for North America.
New wealth zones are everywhere. France's Banque Indosuez, for example, is reorganizing its Asian arm to focus on private banking, and "we intend to develop this aggressively," says Jean-Marie Simart, Indosuez' top private banker in the region. Meanwhile, J.P. Morgan & Co., already no slouch in the private banking business, has spent the last year and a half bolstering its franchises in Latin America, Asia, Europe, and the Middle East.
Even local lenders that never paid much heed to the private banking market are moving in. In Saudi Arabia, for example, United Saudi Commercial Bank recently fitted out its branches with a set of special offices for upper-bracket private clients, complete with plush leather armchairs, free refreshments, and machines spitting out quotes from world markets.
As it expands, private banking is becoming a key part of the essential network of pipelines in the global economy that allows money to flow wherever it can find security or the highest returns. But this is a world with a dark side as well. Despite heightened global scrutiny of illicit financial dealings in the wake of numerous drug scandals and the collapse of the Bank of Credit & Commerce International in 1991, investigators believe that as much as $500 billion to $1 trillion stemming from money laundering, corruption, and other seamy activities is still sloshing around the world financial system.
A good part of this sum is thought to be in private bankers' hands. And while many bankers insist they take the greatest pains to steer clear of dirty money, the pressure to perform under mounting competition may prompt some players to loosen their standards in order to turn a profit.
And for a banker really willing to take on an unsavory client, notes business author Jeffrey Robinson, whose new book, The Laundrymen, chronicles the netherworld of finance, it's becoming easier than ever to make dirty money vanish. "Once you turn the cash into a blip on a computer screen," he says, "it's gone."
If the current investigation of Salinas' finances in Mexico, Switzerland, France, and the U.S. lead to disclosures of wrongdoing, there is sure to be a tightening of rules for international banking, just as there was after the collapse of BCCI.
Many execs at big private banks--including Citi--maintain vehemently that they steer clear of questionable business. They say they check prospective clients' references extremely carefully--at times tapping as many as 20 sources for background information. And they say that more often than not, they'll turn away business from politicians and their families.
But many other clients with less august standing fail to get through private bankers' doors. Credit Suisse, for instance, recently set up a special task force to examine the credentials of would-be clients from Russia. Equally cautious is Republic New York Corp., a deep-pocketed international financial group whose private banking roots stretch back to the Ottoman Empire. "We are very careful about whom we open a relationship with," insists Chief Financial Officer Thomas F. Robards. "As a general rule, with anyone who has a high profile, we are careful."
With memory of the hunt for former Filipino dictator Ferdinand Marcos' illicit Swiss accounts still fresh, the heightened scrutiny is all for the good. But for the vast majority of players, there are more than enough honestly created assets to go around. Take the U.S., which many see as the private banking opportunity of a lifetime. For one thing, it still holds half of the global $15.45 trillion wealth market. America is also home to a growing crop of entrepreneurs, the folks that top many private bankers' "must have" list.
These prime prospects are concentrated mainly in such high-income-growth areas as Silicon Valley, the South, and on Wall Street. But U.S. banks hardly have the business to themselves. Fidelity Investments and Merrill Lynch are only two of the securities-industry heavy hitters that are giving American banks a run for the private clients' money (table, page 144).
So are international banks. Credit Suisse's Sloan, for one, pores over newspapers every week in search of little-noticed entrepreneurs made suddenly wealthy by Wall Street's boom. With $3 billion in U.S. assets already under management, he is now targeting "the top end of the wealth pyramid"--individuals with a net worth of $35 million and up who have at least $10 million to invest.
CHINA WATCH. It's much the same story in booming Asia, where multimillionaires are being created with shocking speed. In Hong Kong not long ago, representatives of more than 60 banks turned out for a McKinsey & Co. seminar on the private banking business. And everybody is eyeing China, where assets available for private investment already have hit an estimated $100 billion. As more business owners from the mainland set up shop in Hong Kong prior to its handover to Beijing next year, huge new pools of capital are already starting to accumulate in the British colony. When Beijing eventually allows its citizens to freely move money out of the mainland, Hong Kong "will be the first port of call," says M. Monica Wong, managing director for private banking at HSBC Investment Bank Asia Ltd., which manages $40 billion in individuals' funds. Adds Wong: "There's plenty of money in Asia, and it's growing fast."
Assets are on the rise as well in Brazil, where Bank of Boston Corp. is out to raise $1 billion over the coming year by targeting individuals "who have $1 million to invest," says Suzanne Meyer Ferreira, Sao Paulo-based director of private banking. And Russia and Eastern Europe represent markets with huge growth potential. Indeed, Switzerland seems to be on its way to becoming one of the primary offshore banking centers for the region's new rich.
No one knows exactly how much Russian money is calling Switzerland home. But Aeroflot not long ago added three Moscow-Geneva flights a week to its existing daily service to Zurich, and for many passengers, apparently, it's the money express. Reporting on the upgraded route, a Swiss TV camera crew headed out to Geneva's Cointrin Airport to film an arriving flight. Most of those climbing off the aircraft carried bulging briefcases, holding them up to shield their faces from view. That has piqued the interest of federal prosecutor Carla del Ponte, who notes that the number of Russians applying for tourist visas to Switzerland rose from 10,000 in 1994 to 60,000 in '95 and is still going up.
HEDGING. Mexican politicians and executives have been sending their millions overseas for decades--especially prior to the currency devaluations and economic turmoil that seem to hit Mexico when a new President takes office every sixth year. Indeed, when they sit down with their clients, private bankers are as likely to play on fears as they are to stress financial performance.
In pitches to entrepreneurs in Russia and Asia, for example, bankers highlight the risks of political instability. One big U.S. bank, in fact, is shifting much of its Asian private banking operations from Hong Kong to Switzerland to reassure customers worried about the handover of the British colony to Beijing next year. Says the institution's top private banker: "Although we're 100% confident about 1997, we're preparing for the worst."
Private bankers covering Latin America, meanwhile, are playing up the need to continue hedging against the abrupt ups and downs the region's economies have suffered over the past 15 years. Many wealthy Latins moved hundreds of billions of dollars out of the region this way in the 1970s and early '80s, when the region was flush with loans from many of the same banks that were signing up private clients as fast as they could.
The rise in private banking is turning healthy profits for many lenders. While returns on private banking are perhaps a third of those on credit cards, they still are nothing to sneeze at. Felix W. Zulauf, a money manager and former private bank strategist in Zug, Switzerland, estimates that wealthy clients pay fees equivalent to 1% or more of their assets--as much as 10 times what banks can charge pension funds or other big institutions.
Indeed, Citicorp earns some $200 million, or 6% of its annual profits, from its private bank. What's more, Chairman John S. Reed expects even greater contributions. He recently told his 200 top executives that the private bank should account for 15% to 20% of Citi's profits by 2000 or 2001. Citi may accomplish this by acquiring a money-management firm. Meanwhile, Union Bank of Switzerland, Swiss Bank, and Credit Suisse, the three largest Swiss banks that together control an estimated $1 trillion in private banking assets, are shaking up their own private banks.
Both are turning to big U.S. asset-management subsidiaries that each has acquired in recent years to pump up their global investment returns. Offering better performance and more sophisticated products, from emerging-market funds to derivatives, they hope to persuade customers from defecting. Then again, it's little wonder the Swiss are on the defensive: By some estimates, private banking will add as much as $20 billion to Swiss banks' coffers in 1996.
These revenues pay for big customer perks. Private bank "relationship managers" long have been as comfortable getting clients' kids into top U.S. colleges or arranging for medical treatments as they were in mastering the Eurodollar yield curve, and that level of attention shows little sign of diminishing. One well-known private bank, for example, keeps its most prized billionaire client up to date with daily faxed copies of the Financial Times, The Wall Street Journal, and the International Herald Tribune, along with weekly pouches of additional reading material--and frequent face-to-face visits from senior executives. "You become part of the family," says a Citibank private banker, one of many who are on call 24 hours a day to satisfy his biggest customers' needs. "They send their private jets to pick you up."
INEXPLICABLE ENRICHMENT? Certainly, Mexico's Raul Salinas received his due share of hand-holding from his private Citibanker. Salinas has been jailed in Mexico on charges of murder conspiracy and inexplicable enrichment. In testimony first reported in The New York Times, he told investigators that his Citi private banker, Amy C. Elliott, designed an intricate web of financial transfers among Mexico City, New York, the Cayman Islands, London, and Citibank's own subsidiary in Switzerland, among others, that he hoped would preserve his anonymity and earn high returns. Elliott was unavailable for comment. Citi says that "we constantly watch for possible violations of the laws by the bank or its employees, and...we have found no reason to believe there have been any."
Salinas has maintained that his offshore accounts held the legitimate proceeds of loans and contributions earmarked for a venture-capital fund to develop Mexican resort projects. In fact, Grupo Iusacell CEO Carlos Peralta Quintero, a telecommunications magnate whose business flourished during the Salinas years, has acknowledged wiring $50 million to Raul's offshore accounts after shaking hands on an investment deal in 1994.
Perks and hand-holding, of course, have long been a staple of private banking. And with the intensified competition to court new clients, bankers are offering many more services, from new products to premium investment performance. In the wake of the Salinas episode, though, many private bankers are certainly reassessing just how far they ought to go to accommodate their clients.